As previously discussed, 529 plans can be complicated and time consuming to understand, yet given the skyrocketing costs associated with postsecondary education and subsequent student debt accumulation, I thought it might be worthwhile exploring whether a 529 plan might be helpful when using one for your educational expenses as well. For readers considering furthering their education.
What Is a 529 Plan? A 529 plan is a tax-advantaged savings vehicle created to facilitate savings for future education costs for an intended beneficiary. They’re often known as Qualified Tuition Programs (QTPs), although its name comes from its section (529) within the IRS tax code.
There are two different kinds of 529 plans – prepaid tuition plans and tax-advantaged savings plans. Unfortunately, only a handful of states still offer prepaid tuition plans, so I won’t spend too much time discussing these here. All 50 states administer 529 savings plans, however; and you are free to select any 529 plan offered in any state; though selecting one offered by your place of residence could have some additional advantages.
529 savings plans offer several key advantages. Some states allow tax deductions on some or all contributions. Also, while contributions aren’t federal income tax deductible, earnings from qualified withdrawals are tax-free if they meet IRS criteria – much like Roth IRA’s with an added potential state tax deduction benefit.
529 plans do have their share of downsides and risks; more on that later.
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